Net Neutrality, and Regulation by the Unicorn State

images-4Net Neutrality” is a hot issue. It refers to equal service quality for all web-based traffic, against a fear that Internet providers (like Verizon) will allow (or effectively force) some to pay more for faster data delivery, making others second class netizens. So some advocate designating the Internet a “public utility” subject to FCC regulation to enforce net neutrality. This plea is highly seductive.

UnknownSimilar regulation by the Interstate Commerce Commission was imposed on railroads in 1887. No; “imposed” is the wrong word; actually the railroads wanted this, seeing ICC regulation as a tool to protect their market power against upstart competition.

I spent my professional career as a public utility regulator. One of my first cases targeted a small moving company breaking the rules. Its transgression? Prices too low. Were we protecting the public? Certainly not; we were protecting the established moving companies. This is the face of regulation in the real world.

Columnist L. Gordon Crovitz in the 8/18 Wall Street Journal notes that the ICC enforced a kind of “net neutrality” on the railroads: prohibiting “discriminatory” volume discounts or other market-oriented pricing schemes.* Result: a stagnating U.S. rail industry. The ICC was finally abolished in 1995, but the lingering effects of this deadening regulation leave American train service shabby compared to spiffier European or Far East rail systems.

images-1Crovitz also discusses the heavily regulated taxi industry. He quotes the New York City regulator’s website explaining that before it stepped in, the taxi business was a free-for-all with numerous competitors using “underhanded tactics” – like “drastically lowering fares to get more business.” The horror! The horror!

But today, across the globe, the taxi business is being up-ended by innovators like Uber and Lyft giving smartphone-using consumers service better tailored to their needs. And a battle royale is underway between these feisty upstarts and the old regulators (backed by the stodgy old taxi firms) struggling to hobble them. A similar war pits the old hotel industry against newcomers like Airbnb disrupting their business model by providing alternatives more attractive to consumers. This is what economist Joseph Schumpeter famously called “creative destruction” – it’s how an economy progresses – a great virtue of a truly free market.

imagesDo we really want to give the FCC regulatory power to squelch this by enforcing its ideas of service and pricing for the Internet? Or let creativity rip, with businesses free to innovate on services and pricing tailored to a swiftly changing technological landscape, responding to market forces and consumer preferences and needs?

Business-hating lefties think government must keep them on a tight regulatory leash lest abuses occur. And absent regulation they would occur. But I believe the costs and harms to consumers would be simply overwhelmed – overwhelmed – by the benefits in better products and services, lower prices, and greater overall societal wealth, if all regulation were abolished.

Think I’m nuts? Then look at China, where that’s exactly what happened. Since 1978, China’s private sector has been virtually free of regulation. And, yes, abuses have occurred. But meantime average per-capita income has grown 3000% – thirtyfold. I repeat: thirtyfold. (99-percenters take note.)

I wrote recently about an abuse by government, the unjust prosecution of innocent Muslim-Americans on phony “terrorism” charges. I marched in protest with local liberals. But they, I said, are like battered spouses who still profess undying love for their batterers – no matter how much it tramples their ideals, still liberals love government. images-2The same Wall Street Journal issue elsewhere quotes economist Michael Munger: “My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA. But their solution is, without exception, to expand the power of ‘the State.’ That seems literally insane to me . . . Then I realized they want a kind of unicorn, a State that has the properties, motivations, knowledge and abilities that they can imagine for it. [They] imagine a State different from the one possible in the physical world.”

I just got a call from a car repair business asking if I was “completely satisfied” with their service. I’ve never received such a call from a government agency.

* America’s first federal conviction of a corporation, in 1909, was for a railroad’s crime of cutting prices.

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7 Responses to “Net Neutrality, and Regulation by the Unicorn State”

  1. @carlosmigueld Says:

    Would Facebook have overtaken MySpace if Net Neutrality had not existed this past decade?

    Would new businesses like Netflix or a host of Internet of Things (smart home appliances) products have taken off without Net Neutrality?

    What traffic-based startup like Pandora or Soundcloud or Spotify or Shazam would be around and able to employ tens of thousands of people without Net Neutrality???

    Government or ISPs: Which do I trust MORE on the issue of net Neutrality? I trust government infinitely more on this topic. And so does any web user.

    Now if you want to kill the competitive advantage of the USA and cede tech startup innovation to China India Brasil Europe then continue with your naïveté.

  2. rationaloptimist Says:

    You seem to imagine that the providers of network services would somehow profit from killing off, or strangling at birth, some of their most lucrative customers. Or would do so out of, what, mean-ness? Nobody would be more keen on nurturing a vibrant, flourishing panoply of internet-based businesses than would the companies providing the platforms for such businesses. I would rather let them develop their service options, to that end, than imagine government regulators can do a better job of landscaping the internet environment to make new businesses there flourish.
    Indeed, one way to stimulate the kinds of innovative start-ups that you talk about would be for internet service providers to give them preferential introductory rates. But of course government regulators would scotch that as discriminatory. Just as they did in the case of the railroads — all but destroying the American rail industry.

  3. esnible Says:

    Your free-market stance makes a lot of sense for the Internet backbone.

    My preference for the backbone is to ignore neutrality, but to require it for “the last mile”, especially in municipalities where broadband Internet is only served by a single monopoly provider.

    My pro-neutrality friends claim that the incumbent network providers would choose to block new technologies or gmail in favor of their own pet services. They are correct. However we could imagine a whole new class of Internet middle-men on the backbone offering traffic encapsulation, encryption, and high performance. There is a lot of space there for innovation.

    But what about the last mile, where there is only one wire to a subscribers house and the subscriber doesn’t own the wire and is not permitted to buy it. Are there any conditions under which neutrality makes sense?

    There is also a “transaction cost” argument. If every service provider must negotiate with every network provider there is a lot of overhead. Deregulation of telephony has benefitted me — I pay a fixed rate for all calls in the USA. Part of this is new tech, but in the old days of AT&T half the expense of operating he network was getting the correct per-call billing working. Under the current scheme operators charge their direct connections, typically by volume. Charging everyone, for traffic volume and performance seems really difficult once we move beyond the current “shake down Netflix” model.

  4. rationaloptimist Says:

    Re “last mile,” my basic predilection is for “pay for what you use” (and I have some personal history advancing that in the telephone industry during my regulatory career). Heavier users should pay more — assuming they impose greater costs on the system. But this must be balanced against “universal service” concerns.

  5. EriK Says:

    Frank,
    Isn’t there a distinction between passenger and freight rail?
    http://www.coyoteblog.com/coyote_blog/2008/02/european-vs-ame.html
    I’m sympathetic to Holman Jenkins’ view on Net Neutrality.
    http://online.wsj.com/news/articles/SB10001424052702303426304579404832175692084
    Surprised I don’t see more press mentioning Tim Wu’s role with Net Neutrality during the campaign, such as it is. .

  6. rationaloptimist Says:

    Yes, passenger & freight are different; but in USA both are crappy; and I agree that Europe’s rail systems are heavily featherbedded. But that doesn’t contradict the fact that they are much more modern & user-friendly.
    Your Holman link doesn’t allow reading the article.

  7. EriK Says:

    Google the title of the article and you should get around the paywall.

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